Life Estate & Rental Property

[WDML]

What is the name of your state? MA

A single parent gifts his residence to his adult children but retains a life estate; later he moves out of the house, and converts the property to a rental. His children actively manage the property, collecting rents, making repairs, signing leases, etc.

Can the children report the net rental income/loss on their tax returns as partners in a rental real estate passive activity, or is the parent "required" to report this on his tax return?

If the intention of the parent was to gift the house, and he wants his children to report the rental income on their tax returns, does he have to relinquish his life estate? I realize that the children would not receive the stepped up FMV on the parent's death if this were to occur.

Your opinions?

WDML

 

[tranquility]

The life estate has rights to possession. The rental income is the father's. Kids can charge a management fee for the work they do and report it on Schedule C. It would not be passive income to them. Without numbers it would be difficult to see the results of how everything would work out.

The step-up in basis is mostly destroyed already. The life estate would cause a discount in the value of the remainder gift to the kids, and a full step-up when the father dies is not possible.

See an attorney or accountant. With this much wealth, it shouldn't be hard to accomplish the goals you want (unless steps have already been taken).

 

[FlyingRon]

Tranquility is right. In Massachusetts (baring explicit terms to the contrary) the right to rent and the income from that rental belong to the life tenant.

Deeding away property is almost always the wrong thing to do anyhow, but that's water under the bridge.

 

[abezon]

The kids could deed it back to dad so that dad can set up a grantor trust & they inherit that way.

This is why you hire an estate planning attorney in the first place. At least you twigged to the potential basis problems before dad passed away & have time to adjust the deal.